Euro to fall 'Rapidly' to $1.03 After Breaching $1.19: Charts

George Soros and other hedging masters must be rubbing their hands with glee. Statements like “we will do whatever it takes” to protect the euro is an open invitation to short. The relief rally in the euro following the $1 trillion emergency package announced by the EU and IMF is a collective exhalation. Still, it does not make the underlying problems disappear.

It is useful to step away from the clamor of fat finger errors on the Dow, Greek riots and the euro slide and focus for a bit on strategic analysis, which is as important as tactical responses to these events.

From a charting perspective this calls for a monthly chart of the euro-dollar, where each candle (shown in the graphic on the left) represents a month of trading.

The advantage this view comes from the way it highlights the skeleton or backbone of the market. Support and resistance levels in particular are clearer. Broad trading behavior is also clarified, but it is the movement between support and resistance that is more useful because it suggests how far the Euro call fall and it sets limits on any rebound.

The disadvantage of this view is that it is more difficult to attach exact values to the support levels. As the market approaches these levels traders shift to a daily chart and ready themselves for action if a rebound develops. These levels are areas of high probability in terms of developing the conditions necessary for a trend rebound, or a trend continuation.

The first strong support area is near $1.25, the upper level of a consolidation band. It provided good support in 2008 and 2009 and was the launching point for the strong uptrend in 2006. This suggests it has a high probability of providing good support in the current environment.

The lower edge of this consolidation area is slightly stronger in charting terms. It is located near $1.19, which provided a support area in 2005 and in 2004, as well as acted as a resistance level in 2003 and 1999. This history indicates a significant role in terms of both support and resistance. This increases the probability that the euro will rebound from this level, although it may lead to a consolidation period. This occurred in 2004 and 2005 with the euro trapped in the consolidation range between $1.19 and $1.25.

The bearish perspective is that a fall below $1.19 could rapidly push the euro down to the lower support level near $1.03. This level was particularly significant in 1998 and in 2003 as a support level.

Shifting from strategy to tactics means traders are ready for a rebound from the $1.25 level but this rebound is likely to be limited. A sustained break on a weekly basis above the downtrend line value on the monthly chart is required before there is any real prospect of a change in the downtrend pressure.

Rebounds offer short-term opportunities. The real potential for a sustainable rebound comes from inside the consolidation area between $1.19 and $1.25.

In short, the current trading environment surrounding the euro is great for traders but very difficult for hedgers. The extreme volatility suggests traders should be prepare for rapid rebounds and breakouts.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.